Congress gets to work on plan for budget mess

Corker circulating fiscal plan

WASHINGTON — Lawmakers including Sen. Bob Corker, R-Tenn., were working Thursday to address the nation's looming "fiscal cliff" as the Congressional Budget Office warned in a new report that tax increases and spending cuts set for the end of the year would hurt the economy and increase unemployment.

The nonpartisan CBO said the budget adjustments scheduled to occur Jan. 1 unless Congress and the White House make a deal will push the nation back into recession and cause a spike in the jobless rate to 9.1 percent. The rate is currently 7.9 percent. The tax and spending changes would cut the federal deficit by $503 billion through next September, said the CBO, as intended. But the adjustments also would cause the economy to shrink by 0.5 percent next year.

The analysis assumes there is a protracted impasse in Washington and the government falls off the "cliff" for the entire year, which most Capitol-watchers now think is unlikely. All sides want to avoid the severe automatic changes, which are a one-two punch of expiring tax cuts and major across-the-board spending cuts to the Pentagon and domestic programs. It is the looming punishment for previous failures of a bitterly divided Congress and White House to deal with the government's spiraling debt or overhaul its unwieldy tax code.

The report, updating an analysis from last May, comes as a newly re-elected President Barack Obama and Congress are promising cooperation on a new budget plan. But difficult decisions await and the politics of raising tax revenue and cutting federal benefits programs is tricky.

Obama will discuss the situation Friday in remarks from the White House East Room. He is expected to urge Congress to pass a bill that would prevent Bush-era tax cuts from expiring for all but the wealthiest Americans.

Corker, who was re-elected easily on Tuesday, said he had begun circulating a draft plan to overhaul the tax code and entitlements, had met with 25 senators from both parties and "been on the phone nonstop since the election."

"The conditions are there to act," Corker said. "I think the environment is different now." Corker said many Senate Republicans were willing to agree to a deal that raises more revenue through an overhaul of the tax code, and that additional revenue must be generated by taxation, not just economic growth.

In a speech Thursday in his home state of South Carolina, Sen. Lindsey Graham said fellow Republicans should hold the line on tax rates, but they had to accept that a reformed tax code would raise more revenues. Only then, he said, can they expect Democrats to negotiate changes to entitlement spending.

House Speaker John Boehner, R-Ohio, has said he will only agree to a deal that lowers the top income tax rate from the current 35 percent, not from the top rate that is scheduled to kick in on Jan. 1, 39.6 percent. He said that additional revenue would be generated by economic growth spurred by a simpler tax code, not by higher taxes.

Sen. Charles Schumer of New York, the No. 2 Senate Democrat, extended an olive branch to Republicans, suggesting that he could accept a tax plan that leaves the top tax rate at 35 percent, provided that loophole closings would hit the rich, not the middle class. He previously had said that he would accept nothing short of a return to the top tax rate of Bill Clinton's presidency, 39.6 percent.

"If you kept them at 35, it's still much harder to do," Schumer said, "but obviously there is push and pull, and there are going to be compromises."

The accelerated activity in Washington showed that members of Congress believed the election had amplified the imperative for both parties to strike a deal. Even conservative Republicans are signaling newfound flexibility. Aides said that on a conference call of House Republicans, a number of lawmakers spoke up to say they needed to give their leaders breathing room and avoid brinkmanship.

Still, signs that both sides are open to some compromise are no guarantee that they can reach a deal. Many Republicans will resist any proposal that can be read as increasing taxes, and many Democrats will balk at changes in entitlement programs and spending cuts.